5 Earnings Short-Squeeze Plays - views

DELAFIELD, Wis. (Stockpickr) -- Short-sellers hate being caught short a stock that reports a blowout quarter. When this happens, we often see a tradable short squeeze develop as the bears rush to cover their positions to avoid big losses. Even the best short-sellers know that it's never a great idea to stay short once a bullish earnings report sparks a big short-covering rally.

This is why I scan the market for heavily shorted stocks that are about to report earnings. You only need to find a few of these stocks in a year to help enhance your portfolio returns -- the gains become so outsized in such a short time frame that your profits add up quickly.

That said, let's not forget that stocks are heavily shorted for a reason, so you have to use trading discipline and sound money management when playing earnings short-squeeze candidates. It's important that you don't go betting the farm on these plays and that you manage your risk accordingly. Sometimes the best play is to wait for the stock to break out following the report before you jump in to profit off a short squeeze. This way, you're letting the trend emerge after the market has digested all of the news.

Of course, sometimes the stock is going to be in such high demand that you risk missing a lot of the move by waiting. That's why it can be worth betting prior to the report -- but only if the stock is acting technically very bullish and you have a very strong conviction that it is going to rip higher. Just remember that even when you have that conviction and have done your due diligence, the stock can still get hammered if The Street doesn't like the numbers or guidance.

If you do decide to bet ahead of a quarter, then you might want to use options to limit your capital exposure. Heavily shorted stocks are usually the names that make the biggest post-earnings moves and have the most volatility. I personally prefer to wait until all the earnings-related news is out for a heavily shorted stock and then jump in and trade the prevailing trend.

My first earnings short-squeeze play is designer, producer and retailer of functional accessories for women Vera Bradley (VRA), which is set to release numbers Wednesday after the market close. Wall Street analysts, on average, expect Vera Bradley to report revenue of $124.81 million on earnings of 32 cents per share.

Just this morning, Lazard Capital said it expects Vera Bradley's second quarter results to miss guidance and consensus estimates and reiterates a sell rating on the stock with a $16 price target. The firm also said the company's third quarter outlook will miss estimates due to sales below plan and promotions above plan.

The current short interest as a percentage of the float Vera Bradley is extremely high at 55.2%. That means that out of the 21.61 million shares in the tradable float, 11.09 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 5.4%, or by about 565,000 shares. If the bears get caught pressing their bets into a bullish quarter, then shares of VRA could easily rip higher post-earnings.

From a technical perspective, VRA is currently trending below both its 50-day and 200-day moving averages, which is bearish. This stock has been downtrending badly for the last month and change, with shares falling from its high of $26.33 to its intraday low of $18.67. During that move, shares of PBY have been consistently making lower highs and lower lows, which is bearish technical price action.

If you're bullish on VRA, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance at $20.09 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 423,263 shares. If that breakout hits, then VRA will set up to re-test or possibly take out its 50-day moving average at $21.79 or its 200-day moving average of $23.30 a share.

I would simply avoid VRA or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back its 52-week low at $18.67 a share (or its intraday low Wednesday if lower) with high volume. If we get that move, then VRA will set up to enter new 52-week low territory, which is bearish technical price action. Some possible targets if we get that move are $16 to $15 a share.

Restoration Hardware

Another potential earnings short-squeeze trade is home furnishings retailer Restoration Hardware (RH), which is set to release its numbers Tuesday after the market close. Wall Street analysts, on average, expect Restoration Hardware to report revenue of $377.60 million on earnings of 43 cents per share.

Just recently, Janney Capital initiated shares of Restoration Hardware with a buy rating and a price target of $82 per share.

The current short interest as a percentage of the float for Restoration Hardware is pretty high at 10.6%. That means that out of the 34.27 million shares in the tradable float, 2.55 million shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 11.7%, or by about 267,000 shares. If the bears get caught pressing their bets into a strong quarter, then shares of RH could experience a big short-squeeze post-earnings.

From a technical perspective, RH is currently trending above both its 50-day and 200-day moving averages, which is bullish. This stock has been uptrending strong for the last month and change, with shares moving higher from its low of $63.81 to its intraday high of $78.29 a share. During that move, shares of RH have been consistently making higher lows and higher highs, which is bullish technical price action. That move has now pushed shares of RH into news 52-week high territory, which is bullish technical price action.

If you're in the bull camp on RH, then I would wait until after its report and look for long-biased trades if this stock manages to take out its all-time high of $78.29 a share (or its intraday high Tuesday if greater) with high volume. Look for volume on that move that hits near or above its three-month average action of 656,881 shares. If that breakout triggers, then RH will set up to enter new all-time high territory, which is bullish technical price action. Some possible upside targets off that move are $85 to $90 a share.

I would simply avoid RH or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support $72 a share to its 50-day at $69.90 a share with high volume. If we get that move, then RH will set up to re-test or possibly take out its next major support levels at $66 to $65, or even $64 a share.

Oxford Industries

One potential earnings short-squeeze candidate is men's apparel products player Oxford Industries (OXM), which is set to release numbers Tuesday after the market close. Wall Street analysts, on average, expect Oxford Industries to report revenue of $243.48 million on earnings of 98 cents per share.

If this company can manage to beat or meet Wall Street's earnings estimates this quarter, then it would mark the biggest quarterly gain in the last six quarter.

The current short interest as a percentage of the float for Oxford Industries is not able at 5.7%. That means that out of the 14.31 million shares in the tradable float, 817,000 shares are sold short by the bears. The bears have also been increasing their bets from the last reporting period by 3.8%, or by about 29,000 shares. If the bears are caught being too aggressive into a solid quarter, then shares of OXM could soar higher post-earnings as the bears rush to cover some of their bets.

From a technical perspective, OXM is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock recently sold off hard from its August high of $69.29 to its low of $61.10 with higher-than-average volume flows. Shares of OXM have now started to rebound a bit off that low of $61.10 with strong upside volume flows. That move is quickly pushing shares of OXM within range of triggering a near-term breakout trade.

If you're bullish on OXM, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average at $65.77 a share to more resistance at $65.93 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 103,286 shares. If that breakout triggers, then OXM will set up to re-test or possibly take out its 52-week high at $69.28 a share. Any high-volume move above that level will then give OXM a chance to trend well north of $70 a share.

I would avoid OXM or look for short-biased trades if after earnings it fails to trigger that move, and then drops back below some key near-term support levels at $63 to $61.10 a share with high volume. If we get that move, then OXM will set up to re-test or possibly take out its next major support levels at $57.70 a share to its 200-day moving average at $57.09 a share.

Coldwater Creek

Another earnings short-squeeze prospect is specialty retailer of women's apparel, accessories, jewelry and gift items Coldwater Creek (CWTR), which is set to release numbers Tuesday after the market close. Wall Street analysts, on average, expect Coldwater Creek to report revenue of $162.81 million on a loss of 63 cents per share.

The current short interest as a percentage of the float for Coldwater Creek is very high at 18.8%. That means that out of the 12.17 million shares in the tradable float, 3.47 million shares are sold short by the bears. This is a big short interest on a stock with a very low tradable float. If the bulls get the earnings news they're looking for, then this stock could easily explode higher post-earnings.

From a technical perspective, CWTR is currently trending just below its 50-day moving average and well below its 200-day moving average, which is bearish. This stock has been trending sideways for the last two months, with shares moving between $2.16 on the downside and $2.80 on the upside. A high-volume move above the upper-end of its recent range could trigger a breakout trade for CWTR post-earnings.

If you're bullish on CWTR, then I would wait until after its report and look for long-biased trades if this stock manages to break out above some near-term overhead resistance levels at $2.51 to $2.69 a share and then once it takes out more resistance at $2.80 a share with high volume. Look for volume on that move that hits near or above its three-month average action of 192,994 shares. If that breakout hits, then CWTR will set up to re-fill some of its previous gap down zone from June that started near $3.60 a share.

I would simply avoid CWTR or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support levels at $2.35 to its 52-week low at $2.16 a share with high volume. If we get that move, then CWTR will set up to enter new 52-week low territory, which is bearish technical price action. Some possible targets off that move are $1.80 to $1.78 a share.

Pep Boys -- Manny, Moe & Jack

My final earnings short-squeeze play is auto shop and care for car provider Pep Boys  Manny, Moe & Jack (PBY), which is set to release numbers Tuesday after the market close. Wall Street analysts, on average, expect Pep Boys  Manny, Moe & Jack to report revenue of $539.35 million on earnings of 19 cents per share.

The current short interest as a percentage of the float for Pep Boys  Manny, Moe & Jack is notable at 5.3%. That means that out of the 49.15 million shares in the tradable float, 2.73 million shares are sold short by the bears. This is a decent short interest on a stock with relatively low float. Any bullish earnings news could easily spark a sharp short-covering rally for shares of PBY post-earnings.

From a technical perspective, PBY is currently trending above its 200-day moving average and just below its 50-day moving average, which is neutral trendwise. This stock recently pulled back from its August high of $13 to its low of $10.94 a share. Shares of PBY have now started to rebound off that $10.94 low and its moving back above its 200-day moving average at $12.08 a share. That move has pushed shares of PBY within range of triggering a near-term breakout trade.

If you're in the bull camp on PBY, then I would wait until after its report and look for long-biased trades if this stock manages to break out above its 50-day moving average at $12.08 a share with high volume. Look for volume on that move that hits near or above its three-month average volume of 236,667 shares. If that breakout hits, then PBY will set up to re-test or possibly take out its 52-week high at $13 a share. Any high-volume move above that level will then give PBY a chance to re-fill some of its previous gap down zone from mid-2012 that started at $15 a share.

I would avoid PBY or look for short-biased trades if after earnings it fails to trigger that breakout, and then drops back below some key near-term support levels at $11.24 to $10.94 a share with high volume. If we get that move, then PBY will set up to re-test or possibly take out some key near-term support at $10.21 a share to its 52-week low at $9.17 a share.

At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Delafield, Wis., is an independent trader who focuses on technical analysis for small- and large-cap stocks, options, futures, commodities and currencies. Roberto studied international business at the Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany. His work has appeared on financial outlets including CNBC.com and Forbes.com. You can follow Pedone on Twitter at www.twitter.com/zerosum24 or @zerosum24.